Bank of Japan Faces Pressure as Long-term Interest Rates Approach 2%
TOKYO, December 11, 2023 – The Bank of japan (BOJ) is navigating a delicate situation as long-term interest rates creep towards the 2% threshold, possibly triggering selling from market participants holding unrealized losses. Experts warn the central bank must carefully calibrate its policy response, particularly as rates climb with no clear turning point anticipated before reaching around 2.5%.
The approaching 2% level is significant because exceeding it could initiate a wave of selling by investors who have previously absorbed losses, potentially escalating into further declines in Japanese government bond values if concerns about a credit downgrade surface. A rise in expectations for the terminal rate generally leads to yield curve steepening, contrasting with flattening pressures. This comes as the BOJ prepares for its December meeting, where Governor Ueda is expected to outline the future path of interest rate hikes and clarify the level of the neutral interest rate.
Analysts note that a rise in the terminal rate expectation often results in a steepening of the yield curve, rather than the flattening typically observed. Once the 1.95% mark is surpassed, market participants with unrealized losses may begin to offload holdings. The BOJ’s policy decisions will be crucial in managing market expectations and preventing destabilizing shifts in bond yields.
